The New Power Brokers

Tomoko Yamazaki discusses in a Bloomberg article how current market dynamics have created four new power brokers: Asian governments, oil exporters, hedge funds, and private equity groups. The four had a combined $11.5 trillion in funds at the end of 2007, and increased assets by 22% last year. As an illustration of their influence, Asian governments and oil-rich nations invested $59 billion in western financial institutions over the last 15 months. As for the numbers, Asian governments, including sovereign wealth funds, increased to $4.6 trillion over the last decade, oil exporter assets increased to $4.6 trillion by the end of 2007, private equity assets reach $900 billion globally, and hedge funds grew assets under management to $1.9 trillion in 2007.

While each new power broker has provided much needed capital and liquidity to the markets, there are also some potential problems listed. Most notably is how increased liquidity may spur asset price inflation, sovereign wealth funds might use their capital for political means, there is the potential for leverage abuses in the private equity arena, and hedge funds could exacerbate, or even start a financial destabilization given the herd mentality to invest in similar hot sectors, as well as utilize similar trading strategies. While it is mentioned by the author that the rise of the new power brokers could pose risks, it appears that all potential problems have either occurred at one time or another fairly recently, and/or are beginning to show their ugly side once again. Of course, capital and liquidity needs to come from somewhere, and the Federal Reserve and the government can only do so much. So while the trend is intact, we should continue to expect each power broker to have some influence on capital allocation going forward.